HomeNewsThe threat of a downgraded credit rating for America is real and the consequences for gold investment should not be minimized.

The threat of a downgraded credit rating for America is real and the consequences for gold investment should not be minimized.

Posted by James Randolph onJanuary 31, 2011

Credit downgrade could trigger another confiscation of gold.

January 31, 2011 – The threat of a downgraded credit rating for America is real and the consequences for gold investment should not be minimized. Bloomberg columnist Kevin Hassett believes not only that is a downgrade inevitable but “that the U.S. rating should be cut immediately.”

Unless steps are taken at once to drastically reduce the deficit, within six years we will reach the same deficit relative GDP that caused Japan’s first downgrade. And Moody has warned that persisting with current policy could force a downgrade in as few as two years. Of greater concern to gold investors, however, is the specter of default.

There is a common belief that America could never default. That delusion stems from the perception that the dollar is invincible, but it most definitely is not. The dollar is nothing but an IOU backed only by faith in our ability to repay, and that faith will plummet with a downgrade in our credit rating. Default is possible and it has happened before – twice.

The first was ancient history – in 1790 – but the second is very pertinent today. Up until 1933 America contracted to repay its debt with either dollars or gold as the lender preferred. Then we passed a law prohibiting repayment in gold, a unilateral change of contracts constituting default with those demanding gold. At the same time FDR set about shoring up gold reserves by confiscating privately held gold.

The similarities to today’s economic situation are inescapable. Current policies are driving us straight into a repeat of the events of 1933. As the dollar declines our creditors will start demanding repayment in hard assets and the government will again face default.

In my mind, regardless of how remote the possibility of another confiscation may be, it warrants serious consideration. An investment in certified gold coins is still the best protection against that possibility.